Trustees of California’s giant state retirement system finally acknowledged Wednesday that they can’t expect the high returns on investment they had previously projected, a move that means taxpayers will bear hundreds of millions more in costs for public employee pensions.

“It’s going to hurt,” said Palo Alto Administrative Services Director Lalo Perez, who estimated the change would raise the city’s yearly pension tab by more than $1 million.

The California Public Employees’ Retirement System board decision comes at a time when government pension plans are under heightened scrutiny, raising bipartisan alarm over growing costs for benefits more generous than what private employers typically offer.

Critics argue that assuming unrealistically high investment returns masks the true costs of public employee pensions to the taxpayers, leading to even greater costs in future years.

CalPERS, the largest U.S. public pension fund, with about $233 billion in assets, provides retirement benefits for more than 1.6 million California public school and state and local government employees, retirees and their families.

The pension fund’s assumed rate of investment return — also called the discount rate — is key to determining how much government employers must pay each year into the retirement system to cover benefits promised to current retirees and employees.

Even in the wake of the financial meltdown, CalPERS resisted changing its discount rate; it last altered the rate 10 years ago, lowering it from 8.25 to 7.75 percent

The actuary who advises CalPERS’ board recommended lowering the rate this year either to 7.5 percent or 7.25 percent. The board Wednesday went with 7.5 percent, a rate already adopted by San Jose’s municipal retirement plans, whose actuaries also advised 7.25 percent.

Actual CalPERS returns have fluctuated wildly, ranging from 1.1 percent for 2011 to 8.3 percent for the past three years, with a 10-year return of 5.1 percent.

Wednesday’s change in the discount rate is expected to cost the state $303 million — $167 million from the general fund — raising the total yearly pension bill to nearly $3.6 billion. The added cost to schools for nonteacher retirement would be about $137 million.

Gov. Jerry Brown, who has asked lawmakers to adopt serious pension reforms to lower costs, had no comment, according to a spokesman.

Santa Clara County officials had urged CalPERS not to drop the rate, citing added yearly costs to the county of as much as $68 million if the board chose the lower recommendation.

County Executive Jeff Smith said Wednesday that CalPERS’ decision to go with the higher recommended rate will still cost the county $34 million more a year when it becomes effective next year.

How easily Santa Clara County can absorb the cost depends on a number of other unknown variables. The county already is running a $60 million deficit in its hospital program, and its financial future is clouded by uncertainty over the economy, state changes in public safety organization and negotiations with employee unions.

“We can probably deal with it,” Smith said. “The problem is that it isn’t just this, it’s other challenges. There’s a lot of potential risk on the horizon.”

Redwood City Finance Director Brian Ponty said he expected the decision to cost the city an additional $800,000 to $1.2 million annually when it takes effect next year, a hit he called “significant but manageable.” Redwood City budgeted about $11 million to $12 million for its CalPERS obligation this year out of its $82 million general fund.

San Jose is among a small number of large cities and counties that maintains its own retirement system. Only the mayor and City Council members are covered by a CalPERS retirement plan. Mayor Chuck Reed and the council voted this year to explore dropping their CalPERS pension, citing expected cost increases.

San Jose’s municipal pension plans for police officers, firefighters and other workers have seen sharp cost increases in recent years due to benefit increases, market losses and flawed assumptions. The city’s yearly retirement tab has swollen from $73 million a decade ago to $245 million. Reed and the council have approved a measure for the June ballot that would reduce pension benefits for future workers and make current workers pay more for the benefit if they don’t switch to a more modest plan.

Burlingame City Manager Jim Nantell said the city anticipated the reduction, which will cost the city about $500,000, and built it into next year’s budget. The city will be able to accommodate the change without service cuts in part because employee unions have made concessions in recent contract negotiations, Nantell said.

Pension reform advocates said Wednesday that CalPERS’ move validated their argument that the nation’s largest public pension fund has been hiding the true cost to taxpayers of promised benefits by assuming unrealistically rosy investment returns.

“I think it’s a baby step toward fiscal sanity,” said Dan Pellissier, president of California Pension Reform, a group that this year tried to qualify a statewide ballot measure to trim pension costs.

But Steve Maviglio, spokesman for Californians for Retirement Security, a coalition of state public employee unions, said CalPERS simply showed prudent stewardship.

“It was a smart and sound decision and should answer critics’ complaints that CalPERS isn’t being realistic with its numbers,” Maviglio said.

A Stanford Institute for Economic Policy Research report in December argued CalPERS and other state pension systems should be using even lower assumed rates to more accurately reflect current market realities. Joe Nation, the report’s author, said Wednesday’s move was too small a step but that CalPERS was “moving in the right direction.”

John Woolfolk is a city news editor for the Bay Area News Group, based at The Mercury News. A native of New Orleans, he grew up near San Jose. He is a graduate of the UC Berkeley School of Journalism and has been a journalist since 1990, covering cities, counties, law enforcement, courts and other general news. He has been an editor since 2013.